The Coming Boom in Hybrid Cars

Some commentators have questioned whether hybrid sales will fall if gasoline prices decline from their recent record highs. They draw an analogy to the fate of small, fuel-efficient cars in the late 1970s and early 1980s — the last time there was a major rise and fall in fuel prices. I believe that this will not be the case for two reasons. First, although record gas prices certainly enhanced the hybrid’s appeal, allowing the benefits of scale and visibility to root faster in the adoption stage, the market-share increases of hybrids were closely following the S-curve path even before the recent spike in gasoline prices, suggesting that adoption of the new technology is not closely tied to fuel prices.

The second reason is that the analogy with the experience of small cars during the last fuel crisis is flawed. A closer look at the buying trends that were in place then provides further evidence that the fate of hybrids may not be closely correlated with future gasoline prices. During the oil crisis of the 1970s, mini-compacts, such as the Mini Cooper — then the smallest auto available in the U.S. — achieved their highest market share in 1978, when gasoline prices were high. But mini-compacts never really caught on, and their market share declined even as gas prices rose further. The slightly larger subcompacts, such as the Volkswagen Beetle, grew market share only when prices were rising, and lost share from 1982 onward. Compact cars, however, like the Ford Escort and Honda Civic, became widely popular, and the compact class has held the single greatest market share of any segment for nearly every year since 1980. The conclusion we draw from this episode is that the mini-compact was too small to gain wide acceptance among U.S. buyers; the subcompact was still small enough that its market share held up only when fuel prices were high; and the compact has proven to be the most popular compromise between size and efficiency.

Today, the most popular hybrids fall into the compact category, providing the spaciousness that consumers have demanded but offering fuel efficiency as good as or better than the mini-compact and subcompact models of the late 1970s. Moreover, hybrid power trains are being successfully adapted to most vehicle classes, allowing them to appeal across all market segments. All that presently stands to dissuade car buyers from choosing hybrids is a lack of variety and, in times of low gas prices, a slight price premium compared with otherwise similar models. And as production prices fall during the adoption stage of the S-curve, the price premium should disappear.

Automotive history also suggests that the next iteration of hybrid technology — the plug-in hybrid — may be poised to make even larger market-share inroads. Although plug-ins are not yet commercially available, prototypes have been tested extensively. Automakers, including GM and Toyota, are pouring billions into their development, and some models, such as the Chevrolet Volt, are set to debut in 2010. These vehicles feature rechargeable lithium-ion batteries that can be recharged from a conventional electric outlet and can store more energy than the nickel-hydride variety used in the current generation of hybrids. In plug-in hybrids, the electric motor is the primary source of power, and a small internal combustion engine serves as an auxiliary power source. The biggest limitation on plug-in technology currently is the cost of the lithium-ion batteries.

But as battery prices come down, plug-ins could capitalize on the trail blazed by the current generation of hybrids, which has helped consumers grow more comfortable with nontraditional engine types. Across industries and product lines, consumers characteristically respond more aggressively to improvements made to a successful innovation than to the initial innovation. For instance, when the minivan hit the market in 1984, it enjoyed unrivaled success, as there was no other vehicle available that offered a similar combination of form and function. But the minivan’s success was surpassed by the midsized SUV, introduced in 1988. It captured the positive attributes of the minivan (space, size, family friendliness) and expanded on them, offering better styling and driving performance. Today the midsized SUV’s market share is 13.6 percent, compared with 5.1 percent for the minivan.

Resources

Managing Creativity and Innovation, Harvard Business Essentials Series (Harvard Business School Press, 2003): Chapter two of this book, “The S-Curve: A Concept and Its Lessons,” provides a compact account of the concept’s history and implications.

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